Negligence;

Page 1

94 HASKINS & SELLS July
THE successful practice of accountancy
appears, with increasing insistence, to
depend upon a knowledge of law. Business
relationships, and even routine transac­tions
apparently with nothing more than
commonplace significance, frequently force
their way into prominence, because they
have their foundation in some legal instru­ment
which confers on the parties at inter­est
certain obligations as well as certain
privileges. The accountant with increasing
frequency finds himself under the necessity
of reading and interpreting long and in­volved
documents, before he can review
intelligently financial transactions to which
his client has been a party.
The following case, of which the sub­stance
only is given, illustrates the ex­treme
care with which legal documents
should be read, and the caution with which
performance under an agreement should be
verified. Fortunately, the case in ques­tion
does not involve accountants in any
way, but it has a lesson from which they
may profit. It serves further to emphasize
the need, at times, under circumstances of
complicated legal situations, of obtaining
legal advice before rendering certified
statements without qualification.
The New York Court of Appeals, re­versing
the Appellate Division of the New
York Supreme Court, and the Trial Term,
rendered, under date of May 6, 1930, a de­cision
adverse to the defendants, in the
matter of John A. Doyle, appellant, v. The
Chatham and Phenix National Bank of the
City of New York, respondent. (New
York Law Journal, May 23, 1930.)
The Bank was trustee under an inden­ture
covering an issue of collateral trust
gold bonds. The Bank certified certain
bonds as being of the series covered by the
indenture. The plaintiff bought some of
these bonds. The bonds proved uncol­lectible.
The plaintiff brought an action
against the Bank, alleging that the negli­gence
of the Bank was the proximate cause
of his loss. The lower courts decided the
case in favor of the Bank. The Court of
Appeals reversed the lower courts and
granted a new trial.
The meat of the trouble is found in the
simple wording of the certificates printed
on the bonds, which were signed by the
Bank. The certificate read: "This bond
is one of the series of bonds described in the
Collateral Trust Indenture mentioned
therein." From this it appears that all of
the provisions of the trust indenture should
have been satisfied before the Bank could
be justified in signing any certificate.
The trust indenture provided, among
other things, that the collateral deposited
with the trustee should be equal to 110%
of the face of the bonds to be issued; that
the collateral should be trade acceptances
or notes of dealers guaranteed by Motor
Guaranty Corporation, cash or notes of
purchasers in part payment for motor
vehicles, or other first-lien mortgages, such
purchasers' notes being indorsed by dealers
and guaranteed by the Motor Guaranty
Corporation.
The Bank was authorized to authenti­cate
bonds, that is, to sign the certificate in
question, without further inquiry and with
Negligence